investment and portfolio management slides by ihtsham ali

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AIMS Members Amina Ejaz (Leader) Maooz Ullah Ihtsham Ali Sehrish Tbassum

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Market Efficiency Hypothesis

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Outline Introduction History Efficient market hypothesis and its forms Conclusion

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Introduction Model to measure the Future value of stock

price. Also said that a investment theory states

that it is impossible to“ Beat the market” Academically a large body of evidence in

support of MEH. Modern Controversial and Disputed

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Historical Background French Broker, Louis Bachelier, French

Mathematicians told “Theory of speculation” Ignored till 1950s Alfred Cowles suggest to professionals 1960 University of Chicago published

properly 1980s Firth studied the UK stock market and

aproved

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Forms of MEH Weak Form Semi Strong Form Strong Form

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Weak Form The weak form of the EMH states that it is

impossible to predict future stock prices by analyzing prices from the past• The current price is a fair one that considers

any information contained in the past price data

• Charting techniques or of no use in predicting stock prices

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22-07-2013 KSE

Stock  Status current price opening price

NBP -0.65 54.65 55.3

NIB -0.03 2.51 2.54

MCB -3.18 273.75 276

BOP -0.05 15.02 15.07

ABL -0.33 16.33 16.66

Soneri -0.17 8.09 8.26

UBL -0.77 136.37 137.14

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22-07-2013 ISE (05:42 pm)

Stock  Status current price opening price

BOP -0.01 14.2 15.26

MCB -0.2 276.3 276.5

UBL -0.77 - 136.37

NBP -0.7 54.69 55.39

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22-07-2013 LSE

Stock  Status current price

BOP -.01 14.97

NBP -.07 54.69

NIB -0.03 2.51

SILK BANK 0.01 2.40

ASKARI 0.033 16.37

BANK Alfalah -.25 20.90

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Weak FormExample

Solution: According to the weak form of the EMH, neither stock is a better buy, since the current price already reflects all past information.

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Charting People who study charts are technical

analysts or chartists• Chartists look for patterns in a sequence of

stock prices

• Many chartists have a behavioral element

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Semi-Strong Form The semi-strong form of the EMH states

that security prices fully reflect all publicly available information• E.g., past stock prices, economic reports,

brokerage firm recommendations, investment advisory letters, etc.

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Semi-Strong Form (cont’d) Academic research supports the semi-strong

form of the EMH by investigating various corporate announcements, such as:• Stock splits• Cash dividends• Stock dividends

This means investor are seldom going to beat the market by analyzing public news

November 2007 Mushraf declared emergency.

Banking weight in Index move from 36.47 to 32.39%

Trust deteriorated of customer 24th January NBP share price 48Rs. 29th January NBP share price 51Rs. 29th January appointment of Dr. Asif in

NBP as new head

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Online Bank Hacking HBL 11th July Askari Bank Limited 17th July MCB 18th July Soneri Bank 20th July Tameer Bank 22 July 0.2% Down over all banking sector

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NIB (17 july, 2013) -4.5NBP -3.5Bank Alfalah -2.1

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Strong Form The strong form of the EMH states that

security prices fully reflect all public and private information

This means even corporate insiders cannot make abnormal profits by using inside information• Inside information is information not available

to the general public

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Conclusion • Not rely only technical analysis • Market effects from the other then economic

factors • Clear picture of stock future • Lay man have no any place in market • Strong form did not exist in market • Seller must be rational

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